So we got an oversold rally. Or shall I say, a proper oversold rally.
Now comes the hard part -- at least for me -- knowing when we've gotten enough folks back in the pool, so that we can come back down again.
Some might note that we have resistance on the S&P 500, because of the 50-day moving average. But recall a few weeks ago, when I noted that 50-trading days ago is the May time period and that means we're dropping lower numbers and replacing them with higher ones. This means the moving-average line is still rising. Moving average lines that are rolling over tend to be more resistance than rising ones.
I always prefer to go by the indicators, so let's talk about my own Oscillator. You will notice that it did rise on Thursday. The next three trading days may not see that continue. This indicator is based on the 10-day moving average of the advance/decline line and for the next three trading days this moving average is dropping some positive numbers.
The same principle applies as discussed above with the 50-day moving average. If I replace plus 1,077 (net breadth, which is what we drop on Friday) with plus 500, the Oscillator still goes down. The only way it keeps going up is if it's better than plus 1,077.
But once we get past the next three trading days, we drop that long string of negative readings from the early August decline. What does all of this mean? It means that if we do see the market pullback in the next few days, we are going to be right back to an oversold condition by midweek next week.
And what of sentiment? Much will be made of the big moves in the American Association of Individual Investors' (AAII) weekly survey. The bulls plunged by 16 points, while the bears were up by 24 points. Even for these day traders, that's a lot. And for the most part that's bullish on an intermediate-term basis.
So let's take a look at some other times we've seen bulls plunge by this approximate amount. In 2009, they pulled in their horns in mid-January. We did rally a bit, but then, you might recall, we plunged into the March low. Turns out they were right. This is not shown on the chart.
Also in 2009, they pulled in their horns in mid-August. We rallied a bit more, and, lo and behold, had another sharp pullback before we started upward.
In 2010, they did not turn so bearish after the "flash crash," but they flocked from the bull camp in mid-November. We bounced and came back down. But during the final week of 2010, they also turned cautious and they were dead wrong, immediately.
Finally in 2013, they were spot on! They caught a quick 4% whack in the market.
Since November 2017 they have done this five times -- they jump around a lot, you see. For four of those times, there was in fact another move lower, before we rallied again.
One final note on sentiment: The put/call ratio for the Volatility Index, which I spent an inordinate amount of time discussing two weeks ago when it plunged to readings under 20% for four straight days, has now shot up to 119%. That's a whole lot of folks betting on a lower VIX now. The odd thing is the last time they did this was July 10. Stocks didn't much care for a while, but the VIX never really went much lower than that.